Shop-shy public to blame, say experts

Economic fears ... JB Hi-Fi is just one of the retailers caught in the slump.
Photo: Glen Hunt

Retail sector chiefs are powerless against a consumer strike fuelled by fears over the global economy, investors say.

As panicked investors wiped more than $400 million off the market value of surfwear group Billabong and savagely sold off other retail stocks, fund managers conceded the malaise plaguing the sector had little to do with management.

“Because they’ve been through a period of prolonged weakness in sales, there is not a lot left for the company management to alter,” Aviva Investors investment manager John Guadanguolo said yesterday.

“Retailers are down to their bare bones now. Any deterioration is far more dramatic in its impact on the bottom line.”

The retail slump that has seen electronic goods retailer JB Hi-Fi, followed by surfwear company Billabong issue profit warnings and see their share prices slashed are symptomatic of a wider malaise hitting the sector in which consumers are scared to spend.

JB Hi-Fi said, in its first-ever profit warning on Thursday, it was cutting profit margin to compete with rivals and sell product. Yesterday Billabong also said it was cutting profit margin, although a bigger issue was sharply declining sales in Europe as well as a slow start to summer in Australia and initial signs of a slowdown in the United States.

“The interesting thing about these two downgrades is there seems to be the common feature of consumers being literally scared of spending in the light of the European crisis,” said Martin Duncan, portfolio manager, at Arnhem Investment Management in Sydney.

Seasonally adjusted retail sales growth slowed from 0.8 per cent in July to 0.2 per cent in October. Interest-rate cuts in the past two months may encourage people to spend more, but this is unlikely to be immediate.

Structural changes in the economy, such as Australians’ greater willingness to save that has seen the household saving ratio pick up from 0.5 per cent in 2002-03 to 9.2 per cent in 2010-11, may also make people more likely to save extra cash rather than spend it. This gives retail companies scant room for comfort.

Jakov Males, a portfolio manager for Australian equities at UBS, says it will take a while for consumers to get over their past spending hangover.

“During (the buoyant) time when people were surprised how strong sales were and how long they were strong, it’s been difficult to dissuade people from spending. We’re seeing the opposite now. We’re seeing (interest rate) cuts but it’s difficult to persuade people to part with money,” he says.

It is tough persuading some investors to put money into retail at all. Paradice Investment Management founder David Paradice says he cut holdings of retail stocks in “March or April” and put the funds into healthcare and pharmaceuticals. He says he won't go back into retail until he sees “a resolution to the stuff over in Europe”.

Others are more relaxed about the sector. Dion Hershan, the head of equities at Goldman Sachs Asset Management Australia, says while retail sales have been poor, “we’d be very careful not to take this weak period and assume it lasts forever”.